It’s no secret that board members are under more pressure and expected to do more since the corporate scandals earlier in the decade and the subsequent passage of the Sarbanes-Oxley Act.
Just ask the individuals who sit on board committees. According to at least one survey, committee members now participate in more meetings than they ever did before.
For example, from 2002 through 2006, the average number of audit committee meetings doubled from 5 per year to 10, according to a recent report from Huron Consulting. The average number was also 10 in 2005, suggesting that frequent meetings are now the norm as boards grapple with SOX and impose greater oversight on company activities.
That said, the number of committee meetings ranges widely among companies, because neither SOX nor any other regulation stipulates a certain number of audit committee meetings. “There is no one best practice rule,” say Fred Lipman, president of the Association of Audit Committee Members and partner with the law firm Blank Rome.
Fischer
David Fischer at the Loeb & Loeb law firm explains that state law only requires board committees to meet, without specifying how often. They can interact in person, by conference phone call, or via a video conference; the only requirement is that every participant be able to hear everyone else, he says. “The more serious the issues at hand, the more frequent committee members ought to meet.”
Committee members also can act by written consent. But if they choose this route, virtually every state requires votes to be unanimous. One exception is Minnesota, which allows majority by written consent, Fischer says.
A recent survey of 287 audit committee members by the Society of Corporate Secretaries and Governance Professionals found that more than three-quarters of them met in person quarterly. Nearly 52 percent conducted quarterly phone meetings. Virtually no audit committee members meet via video conference.
No long-term historical data exists on how often audit committees meet, but all anecdotal evidence is that the committees’ busier schedule these days stems from SOX. According to Huron Consulting, which studied committee behavior at 164 companies, 60 percent held nine or more audit committee meetings in 2006; only 3 percent held four meetings or fewer. Five years ago, those numbers were 7 percent and 44 percent, respectively.
Lipman stresses that audit committees should meet at least quarterly, timed with the issuance of their company’s four financial reports. “If you meet less than four times, you have a problem,” he insists.
Fischer agrees: “The audit committee must be in control of the audit process.”
Other Committee Work
Audit committees aren’t the only ones meeting more often these days.
Loftus
Geoff Loftus, vice president of the Society for Corporate Secretaries and Governance Professionals, says the Securities and Exchange Commission’s recent rule forcing more disclosure of executive pay has led compensation committees to meet more often too. And if shareholder advisory votes on pay packages become the norm—as many governance observers expect—the committees could get even busier if shareholders start voicing their disapproval.
Meanwhile, the explosion of companies that have instituted some sort of majority voting rule for election to the board of directors has caused the governance and nominating committees to get together more often. “The nominating committee is only affected when there is general resentment of the board and they want to get new directors,” says Loftus.
If a board is seeking a new director nominee, one director may take a leading role in hiring a search firm or otherwise doing recruitment, Fischer says. This individual would then typically communicate with other committee members via e-mail until a strong candidate is identified. Then the entire committee would typically meet in person. “You don’t have to meet every time you have a discussion with a nominee,” says Fischer.
In general, however, Fischer stresses that the more serious the issues, the more frequently the committee members should meet. “Face to face is better than by phone,” he says. “They are more practical.”
If the company is the target of a hostile takeover—or even a friendly offer—the board may create a special committee to negotiate the deal. That committee’s chairman would typically be in contact with the other party, but communicate with the other committee members perhaps twice a week, say experts.
In general, most company charters require the chairperson of a committee to call a meeting. Some, however, permit anyone on the committee to call a meeting. Many committees try to meet around the time of a company’s annual meeting since that is the most likely time all of the directors can meet in person.
In the Charter
Policies on committee meetings and organization vary widely. At Nike, for example, the chairman of each of its six committees determines the frequency, agenda, and length of committee meetings. At NCR, in contrast, the frequency of committee meetings and their agenda must be established jointly by committee chairs and designated management individuals in accordance with committee charters or relevant NYSE listing rules.
TJX Co.’s charter says the audit committee must hold at least nine regularly scheduled meetings annually and special meetings when appropriate. The retailer requires its corporate governance committee and its executive compensation committee to hold at least three regularly scheduled meetings annually, while the finance committee must conduct at least two.
Cardinal Health requires its audit committee, human resources and compensation committee, and nominating and governance committee to meet at least four times per year. The audit committee specifically must meet quarterly.
Other companies provide more latitude for their committees. At TD Banknorth, committee chairmen decide the frequency and length of committee meetings. Aflac says its audit committee shall meet “with such frequency and at such intervals as it shall determine is necessary to carry out its duties and responsibilities.”
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